October 30, 2012

KEEPING CURRENT: Two Federal Courts Issue Expansive Interpretations of the Dodd-Frank Act's Whistleblower Definition

September was a busy month in the world of whistleblower litigation. Within the same week, two different federal district courts issued decisions offering expansive interpretations of the anti-retaliation provision of the Dodd-Frank Wall Street Reform and Consumer Protection Act ("Dodd-Frank" or the "Act"), holding that a plaintiff need not prove that he or she is a "whistleblower" as that term is defined by the Act, in order to bring a successful retaliation claim under Dodd-Frank. (Yes, you did read that correctly.) Put more simply, an employee who does not fit the Dodd-Frank definition of a "whistleblower" may now be able to assert a successful claim that he or she has been retaliated against for being a Dodd-Frank whistleblower. There is little question that these decisions have thus expanded the universe of employees who can potentially bring Dodd-Frank retaliation claims, and are likely to embolden the plaintiffs' bar and spawn more lawsuits.

Dodd-Frank Basics

Dodd-Frank, passed in 2010 in the wake of the 2008 financial meltdown, created a number of incentives designed to encourage corporate insiders to "blow the whistle" and report suspected financial misdeeds and violations of the securities law to government authorities. For example, the Act increased the financial rewards or "bounties" potentially available for employees who make such reports. Employees who follow the procedures established by the Act and prove that they provided the authorities with "original information" that then led to a successful enforcement action, may qualify as a "whistleblower" and be entitled to a substantial monetary reward or "bounty." Dodd-Frank defines "whistleblower" as "any individual who provides . . . information relating to a violation of the securities laws to the Commission in a manner established, by rule or regulation, by the Commission."

In addition to these reporting and anti-fraud mechanisms, Dodd-Frank also includes an anti-retaliation provision, prohibiting employers from taking action against anyone who (1) provides information to the Securities and Exchange Commission (SEC); (2) initiates, testifies in, or assists in an investigation or judicial or administrative action; or (3) makes disclosures that are required or protected under the Sarbanes-Oxley Act of 2002 (SOX), or any other SEC law, rule, or regulation. The law provides that "no employer may discharge, demote, suspend, threaten, harass, directly or indirectly, or in any other manner discriminate against a whistleblower in the terms and conditions of employment," because he or she has engaged in "whistleblowing activity." Given this language, one would think that a person would need to be a whistleblower in order to bring a claim of retaliation for engaging in whistleblowing activity - or does one?

The judges in the following two cases recently answered this question in the negative.

Kramer v. Trans-Lux Corporation

The plaintiff in Kramer v. Trans-Lux Corp., No. 3:11cv1424, 2012 U.S. Dist. LEXIS 136939, at *3 (D. Conn. Sept. 25, 2012), had been Trans-Lux's human resources vice president for 18 years when he became concerned that senior executives were violating the law in their oversight of the company's pension plan. For one, Kramer, the plaintiff, believed that the chief financial officer (CFO) should not have been on the pension committee due to a conflict of interest, and that the pension committee was understaffed. Later, when the plan was amended, Kramer claimed that the CFO had failed to submit the amendments to the board of directors and to the SEC, as required by law. On the two occasions that Kramer expressed his concerns to the CFO, she dismissed them outright.

In March 2011, Kramer again expressed his concerns to the CFO and another executive, but was again rebuffed. Undaunted, Kramer reported his concerns directly to the audit committee and later to the SEC. Soon thereafter, the company launched an investigation of Kramer, reassigned two of his direct reports to other managers, and stripped him of his responsibilities, culminating in his termination on July 22, 2011.

Kramer alleged that the company terminated him in violation of Dodd-Frank's anti-retaliation provision. Trans-Lux moved to dismiss, arguing that Kramer did not qualify as a "whistleblower" as the term was defined in the Act, which states that a whistleblower must provide "information relating to a violation of the securities law to the SEC, in the manner established by the commission." In response, Kramer's lawyers argued that the court could apply the looser definition of a whistleblower contained in SOX, which defines whistleblower to include anyone who discloses information about a possible violation to his superiors.

In rejecting the company's argument, Judge Underhill held that a narrow definition of a whistleblower would "dramatically narrow the available protections available to potential whistleblowers" and thus would be "inconsistent with the goal of the Dodd-Frank Act, which was to improve the accountability and transparency of the financial system and create new incentives and protections for whistleblowers." Judge Underhill also looked to the SEC Rules defining a whistleblower under SOX, which requires only that the individual have a "reasonable belief" of a possible violation of the securities law, and then provide that information to the SEC. Using this definition, Kramer qualified as a whistleblower, as he had reported - both internally and to the SEC - his belief that Trans-Lux had violated SEC rules by failing to report the amendment to the pension plan. Thus, Kramer's claim lives to see another day.

Ott v. Fred Alger Management, Inc.

The plaintiff in Ott v. Fred Alger Mgmt., Inc., No. 11 Civ. 4418, 2012 U.S. Dist. LEXIS 143339, at *2 (S.D.N.Y. Sept. 27, 2012), was a portfolio manager for an investment fund who had concerns about aspects of her employer's trading policy. Ms. Ott raised these concerns internally, and then contacted the SEC on more than one occasion to inquire about making a complaint; she was ultimately fired a few months later. Among her various claims, Ott alleged that the defendant terminated her in violation of Dodd-Frank.

The defendant argued that Ott did not qualify as a whistleblower under the Act because she made her first report to the SEC before Dodd-Frank was enacted. Thus, her second report after the statute was passed did not provide the SEC with any "original information," such that would qualify her for a bounty under Dodd-Frank.

Judge Preska of New York's Southern District rejected this reading of Dodd-Frank, finding that Ott did not have to prove she was entitled to a bounty under the law in order to assert a retaliation claim: "anti-retaliation protections apply whether or not you satisfy the requirements, procedures and conditions to qualify for an award [under Dodd-Frank]." Like Judge Underhill in Kramer, Judge Preska took the broader view of Dodd-Frank's anti-retaliation protections and held that Ott should have her day in court.


To date, only two other courts have analyzed the conflicting whistleblower provisions in the context of Dodd-Frank retaliation claims. See Nollner v. Southern Baptist Convention, Inc., No. 3:12-cv-00040, 2012 U.S. Dist. LEXIS 46484 (M.D. Tenn. Apr. 3, 2012); Egan v. TradingScreen, Inc., No. 10 Civ. 8202, 2011 U.S. Dist. LEXIS 103416 (S.D.N.Y. Sept. 12, 2011). As mentioned previously, Dodd-Frank defines whistleblower as "any individual who provides... information relating to a violation of the securities laws to the Commission in a manner established, by rule or regulation, by the Commission." In contrast, Dodd-Frank's anti-retaliation provision more broadly provides that a whistleblower is anyone who (1) provides information to the SEC; (2) initiates, testifies in, or assists in an investigation or judicial or administrative action; or (3) makes disclosures that are required or protected under SOX, or any other SEC law, rule, or regulation.

Like the Kramer and Ott courts, both courts held that the broader definition of whistleblower contained in the Act governs retaliation claims. However, both of the plaintiffs in those cases failed to meet even the broad definition of whistleblower and the courts dismissed their claims. Thus, the Kramer and Ott decisions mark the first time plaintiffs have survived motions to dismiss Dodd-Frank whistleblower complaints.

These decisions could well result in a steep increase in Dodd-Frank retaliation lawsuits, especially since Dodd-Frank carries a longer statute of limitations than SOX and provides for higher back-pay awards, sweetening the potential payoff for plaintiffs, and offering an even greater incentive for employees and plaintiffs' attorneys to pursue such claims. Employers in the coming months may see plaintiffs styling their retaliation claims similar to that of the plaintiffs in Kramer or Ott, using those complaints as templates to survive a potential motion to dismiss. Thus, it is more important than ever for employers to be diligent in monitoring how they handle employee complaints, and in making sure that there are always legitimate reasons for the discipline of any employee, and especially anyone who has "blown the whistle." You do not want to create the next Kramer or Ott.